Carlyle, H&F Buy Into Consolidating CRO Industry

Target: Pharmaceutical Product Development Inc.

Price: $3.9 billion

Sponsor:The Carlyle Group, Hellman & Friedman LLC

Seller: Pharmaceutical Product Development Inc.

Financial Adviser: Sponsor: Credit Suisse; Seller: Morgan Stanley & Co LLC, Lazard

Legal Adviser: Sponsor: Latham & Watkins LLP, Simpson Thacher & Bartlett LLP, Covington & Burling LLP; Seller: Wyrick Robbins Yates & Ponton LLP; Skadden, Arps, Slate, Meagher & Flom LLP

The Carlyle Group and Hellman & Friedman LLC are the latest buyout firms racing to tap into the rapidly consolidating industry of companies that run clinical trials for pharmaceutical companies, according to an analyst and a source at Carlyle.

The firms agreed Oct. 3 to take Pharmaceutical Product Development Inc. private for $3.9 billion in one of the largest leveraged buyouts of the year. They’ll pay $33.25 per share in cash, a 29.6 percent premium over the company’s closing share price on Sept. 30, if the deal proceeds. The proposed purchase price is 10.8x the company’s projected 2011 EBITDA of $312 million, Eric Coldwell, a managing director in equity research at the investment bank Robert W. Baird & Co., told Buyouts.

Coldwell said the sector is drawing sponsor interest for several reasons: For one, large pharmaceutical companies increasingly outsourcing these services to companies like PPD, and they want to do it with fewer companies; though the top 12 so-called “contract research organizations” dominate the market, there are hundreds of smaller companies that can be folded into bigger platforms; Baird estimates the market for outsourced clinical trials to be about $45 billion, of which CROs handle just under $20 billion, so there’s a lot of runway in the market; and the companies often have a global reach. PPD is also uniquely attractive because it carries no significant debt.

The intense scrutiny that comes with being a public company also makes it more attractive to go private, Coldwell said.

“The client base is looking to globalize, centralize and standardize their purchasing,” Coldwell said. “And the fact is, the work is increasingly going to the bigger players, and the top pharma’s are looking to work with only a handful of companies.”

And by buying an industry leader—Coldwell said PPD is probably the third largest CRO by revenue—Carlyle and Hellman & Friedman don’t have to stress about managing a complex roll-up, in which private equity firms buy a smaller company and seek to expand it by buying up competitors.

“They get a company with strong profit, a clear winner that provides a global platform on day one,” Coldwell said.

The source at Carlyle echoed that sentiment, saying PPD is “already a global enterprise. We want to help them do more of what they’re doing.”

Carlyle and Hellman & Friedman join a growing cadre of buyout firms looking to get into the industry.

In 2003, a group led by One Equity Partners, Temasek Holdings and TPG Capital bought what is widely viewed as the largest CRO, Quintiles Transnational Corp. (Bain Capital and 3i Group plc became investors too in 2008).

More recently, in July, Thomas H. Lee-backed inVentive Health Inc. bought PharmaNet Development Group Inc. for $600 million from JLL Partners, which had bought the company in 2009 for about $100 million. Last year, Avista Capital Partners teamed up with Teachers’ Private Capital to buy INC Research Inc., a company in which Carlyle has also invested via one of its mezzanine funds. Other firms in the sector include Genstar Capital, which bought PRA International in 2007 for $700 million.

Carlyle, led by Managing Director Karen Bechtel, will invest out of its $13.7 billion fifth fund, while Hellman & Friedman, led by Managing Director Allen Thorpe, will invest out of its $8.9 billion seventh fund. Under the agreement, PPD may solicit higher bids from other parties for 30 days; Carlyle and Hellman & Friedman may match any superior proposal.

The firms expect to close the deal in the fourth quarter. Executives at Hellman & Friedman declined to comment.